Tullow Oil Wins $313m Case Against Heritage


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treat geneva;”>In 2010, online Tullow agreed to acquire Heritage’s Ugandan assets pursuant to a Sale and Purchase Agreement (SPA).

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The Uganda Revenue Authority (URA) designated Tullow Uganda Limited as agent in relation to this transaction which required Tullow to pay, on Heritage’s behalf, US$313 million to the URA.

This sum was the outstanding Capital Gains Tax that the Ugandan Government claimed from Heritage in respect of the transaction.

Tullow sought an indemnity from Heritage under the SPA in respect of this US$313 million payment to the URA.

In his judgment, Mr. Justice Burton found in favour of Tullow’s indemnity claim for US$313 million in its entirety and also dismissed Heritage’s counterclaim.

A further hearing will be scheduled in due course to address matters arising from the judgment such as the amount of interest Heritage owes Tullow on the US$313 million and Tullow’s submissions in respect of payment of its costs by Heritage.

Tullow is a leading independent oil & gas, exploration and production group, quoted on the London, Irish and Ghanaian stock exchanges (symbol: TLW) and is a constituent of the FTSE 100 Index.

The Group has interests in over 150 exploration and production licences across 25 countries which are managed as three regional business units: West & North Africa, South & East Africa and Europe, South America and Asia.

The next step will involve a further hearing at which Mr Justice Burton will consider certain consequential matters arising from the judgment, such as the amount of interest Heritage owes Tullow on the US$313 million and the allocation of the costs of the proceedings.

It is hoped that the further hearing will be fixed as soon as possible.

The handing-down on Friday did not involve submissions by the parties. Counsel did not attend, the parties were not represented, and Mr Justice Burton merely issued his judgment formally into the public domain.

In July 2010, when Tullow agreed to acquire Heritage’s Ugandan assets, Tullow agreed with Heritage to pay US$283 million into an escrow account. This was intended to cover the outstanding amount of capital gains tax that the Ugandan Revenue Authority sought, at the time, from Heritage. These funds remain in escrow.

During the proceedings, Tullow undertook, if suitable directions could be agreed and provided to the escrow agent, to permit Heritage to satisfy any judgment in part from the amount held in the escrow account.

Mr. Justice Burton said: “There were the two witnesses from the Claimant Company, Mr Martin and Mr Inch, together with Mr Kabatsi, Senior Partner of KAA…I listened to Mr Martin cross-examined for 3½ days and Mr Inch for the best part of 3. I have thought long and hard about this, but I must record my conclusion that I found them both impressive and honourable witnesses, doing their best to give their recollections and a true account…I concluded that Mr Martin and Mr Inch were both impressive witnesses.”

Mr. Justice Burton added, “I found Mr Kabatsi a persuasive and impressive witness, not surprisingly given the high office which he had held in Uganda.”

During the trial, on 20 March 2013, Leading Counsel for Heritage expressly disavowed any allegations of corruption against Tullow.

Mr Justice Burton did not find that Tullow had engaged in any corrupt activities. Indeed, he was clearly impressed by the conduct, bearing and testimony of our two witnesses (as indicated above). On the last day of the trial, an article in the Daily Telegraph containing these false allegations was pointed out to Mr Justice Burton and his response was as follows:

“I have to say I was very disturbed to see the Daily Telegraph report…I can’t understand how their libel reader didn’t pick it up and stop it. There was absolutely no question of it being true or indeed, as far as I am concerned, privileged. It seems to me to go way outside anything that was said in this courtroom and anyone here from the Daily Telegraph should be ashamed of themselves for allowing it to be published. I trust that if there are any journalists here today they will take a great deal more care.”


Prior to January 2010 the Claimant, Tullow Uganda Ltd, and the First, Heritage Oil and Gas Ltd, each held a 50% interest in the licence of certain petroleum exploration areas in Uganda, known as Blocks 1 and 3A; in addition the Claimant held 100% of the interest in Block 2.

These were very significant oil fields in Uganda, where oil was only relatively recently discovered, and their development was of great significance to the Government of Uganda (“GOU”). The Claimant’s parent company and the Second Defendant, the Defendant’s parent company, are both substantial FTSE companies. Both companies are involved in the business of oil and gas explorations. The Claimant wished to extend its commitment to Uganda and the Defendant to realise its investment in Uganda and move on.

It was a term of the Joint Operating Agreement (“JOA”) between them that in the event of the Defendant wishing to dispose of its 50% interest the Claimant had a right of pre-emption, and when the Defendant entered into first a Letter of Intent in November and then a Sale and Purchase Agreement in December 2009 with a third party, Eni S.p.A., the Claimant exercised its right of pre-emption, with the result that the Claimant and Defendant entered (on the same terms) into a Sale and Purchase Agreement (“the SPA”) dated 26 January 2010, whereby conditional (by Article 2) upon various matters, in particular the consent of the GOU, the Defendant agreed to sell, and the Claimant to purchase such 50% interest.

The condition of the GOU’s consent was obviously crucial, and by Article 2.3 each party agreed to use best endeavors to procure it. The consideration was a Base Purchase Price of $1.35 billion, plus an Adjustment Amount (Article 3.3(a)) to be determined, and by Article 3.1(b) a Contingent Amount of $150 million (or in certain circumstances a lesser amount) conditional as there set out. This amounted to a sum which the Claimant asserts, and the GOU subsequently calculated, to amount to a profit to the Defendant of some $1.3 billion.

Provision was made by the SPA for the incidence of taxes. By Article 7.1 all “Transfer Taxes”, defined as “stamp duty payable under the laws of the Republic of Uganda” were to be borne by the Claimant as purchaser. “Non-Transfer Taxes”, meaning “any Taxes other than Transfer Taxes”, were to be the responsibility of the Defendant as Seller.

This dispute arose out of the indemnity sought by the Claimant in respect of the payment by it on 7 April 2011 to the GOU of US$313,477,500, claimed by the GOU in respect of Non-Transfer Taxes, thus made the responsibility of the Defendant.

Articles 7.2 and 7.3 read as follows, the “Indemnifying Party” being the Defendant and the “Indemnified Party” being the Claimant:

“Any Non-Transfer Taxes arising in respect of the Transaction, including any capital gains tax, shall be borne by the Seller. The Seller shall be solely responsible for the determination of, timely filing for, and prompt payment of, any such Non-Transfer Taxes imposed upon, or attributable to, the Seller or any of its Affiliates. In the event that any Non-Transfer Tax is charged at any time to the Buyer . . . in connection with the Transaction, the Seller shall in each case pay to the Buyer an amount equal to such Tax.”

It added: “The Indemnifying Party shall pay to the Indemnified Party any amount claimed under the indemnities in Articles 7.1 and 7.2 on or before the date that is the latest of (1) 10 (ten) Business Days after demand is made therefore by the Indemnified Party and 10 Business Days prior to the latest date on which the Tax in question can be paid to the relevant Tax Authority in order to avoid a liability to interest or penalties accruing and in circumstances where the Tax in question is not payable in advance of the date on which the amount of Tax is finally and conclusively determined, within 15 Business Days of such date.

Justice Burton said the section provided that for this purpose, an amount of Tax shall be deemed to be finally determined when: the Indemnified Party makes a binding agreement with the Indemnifying Party as to the amount payable in respect of such Tax under the indemnities in Articles 7.1 and 7.2, as appropriate; the Indemnified Party makes a binding agreement with the relevant Tax Authority in respect of the amount of such Tax; or a decision of a court or tribunal of competent jurisdiction is given or any other binding agreement or determination is made in respect of the amount of such Tax from which either no appeal lies or in respect of which no appeal is made within the prescribed time limit. For the avoidance of doubt, this Article 7.3 is subject to the following provisions of this Article 7.

By Article 3.2 of the SPA, the Base Purchase Price was to be paid into an escrow account on the third business day prior to the Closing Date. The Closing Date was in the event 26 July 2010. By an Agreement of that date (“the Supplemental Agreement”) the parties set out as follows, Recital A having referred to the SPA:

On 6 July, the Minister, Ministry of Energy and Mineral Development issued Assignment Approvals to the Seller that were conditional upon the Seller paying all taxes accruing from the Transfer as shall be assessed by the Commissioner, Uganda Revenue Authority (the “Conditional Assignment Approvals”).

On 6 July the Commissioner, Uganda Revenue Authority, delivered to the Seller an Income Tax Assessment assessing taxes in relation to the Transfer in the amount of $404,925,000 (the “Assessment”). The Seller disputes with the Government and the Uganda Revenue Authority (the “URA”) that any tax is payable on or in relation to the Transfer, that either the Government or the URA has the right to issue the Assessment or any other assessment of tax levied on or in relation to the Transfer and the content of the Assessment (the “Dispute”).

On 16 July the Permanent Secretary, Ministry of Energy and Mineral Development wrote to McCarthy Tetrault [the Defendant’s solicitors] and confirmed that upon the Seller depositing with the URA an amount equal to 30% of the amount of tax stated in the Assessment and providing a bank guarantee acceptable to the Government to secure the remaining 70% of the amount of tax, the Government will be satisfied that the conditions set out in the Conditional Assignment Approvals are met.


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